Revenue's tax threat to bondholders

TENS of thousands of mainly elderly investors with a total of £9 billion in guaranteed equity bonds could be affected by an attempt by the Inland Revenue to change the taxation of these bonds.

Until now, returns from these bonds have been subject to capital gains tax (CGT) but the Inland Revenue will argue that they should be subject to income tax at a case to be heard by the Special Commissioners on June 11.

The Financial Services Authority (FSA) said this week that, if the Inland Revenue wins its case, most insurers will be unable to pass any extra taxation directly on to investors. A spokesman added: "Our understanding is that it depends on the terms and conditions of each individual company's contracts."

One firm that has already exercised its right to withhold £5 million from the proceeds of £120 million of bonds maturing this month is Eurolife, a privately owned insurer based in London. Managing director David Wootton said the Inland Revenue lost a similar case last year in the High Court.

However, an early decision on the current case is unlikely: "We have all had counsels' opinion and are confident the Revenue will lose next month but they are expected to appeal and so the issue is unlikely to be resolved before September."

One investor said this week: "I cannot believe that the insurers are allowed to withhold part of the return from what was sold as a 'guaranteed investment'. Even if the Inland Revenue's new interpretation is supported in the courts, this looks like retrospective taxation to me."

An Inland Revenue spokesman said: "We would not wish to put our argument forward in advance of the Special Commissioners' meeting."